On Oil Embargos and the Myth of the Iranian Oil Weapon

The exchange of threats between Iran and the West vis-à-vis Iranian oil exports to European and other consumer countries has received wide attention among policy makers and analysts; IMF officials predict that crude oil prices could increase by as much as 30 percent in case of a halt of Iran’s exports to OECD countries, and if other sources don’t offset the loss of Iranian crude oil. Others claim that all the elements are set for ‘the $200 a barrel scenario’. However, this commentary offers a less pessimistic view, and argues that the potential impacts of such threats on oil market dynamics are often exaggerated. Oil embargos against individual producing countries are in reality difficult to implement, for they require a concerted effort by a large number of buyers to prevent oil producers from diverting crude oil from one market to another. Where they result in a tightening of oil markets and rising prices for consumer nations, they can be relaxed or amended. As for the use of an Iranian oil weapon, the fact remains that despite continuous threats, Iran has never used the oil weapon; the oil weapon remains an indiscriminate policy measure that all producers, including Iran, are reluctant to use; and if ever employed, it is likely to be ineffective and counterproductive from a producer’s point of view. Nevertheless, fears that governments may pursue policies to restrict the flow of energy supplies rattle markets and place a premium on the oil price and contribute to increased price volatility.